An Examination of the Optimal Timing Strategy for a Slow Trader Investing in a High Frequency Trading Technology

Abstract

This paper examines, using a real options approach, the optimal time for financial market investors to adopt a high frequency trading (HFT) technology. When the level of fast trading in the market is high, investors should wait longer before adopting when the cost of the technology is high, and vice versa. However, when the market is highly fragmented, they should invest early (wait longer) when the cost of doing so is high(low). Furthermore, the equilibrium level of investment prescribed by the model exceeds the socially optimal level, and investors should wait longer (invest earlier) than the optimal time when the technology is relatively cheap (expensive) in order to be more socially optimal.